At Heritage, we believe that education is an important part of the estate planning process. On this blog we will be sharing some information, articles, and opinions that you may find helpful along your way.

QPRTs

07/15/2014

Bill and Hillary Clinton are making headlines for their use of the qualified personal residence trust or QPRT — lovingly pronounced “kew-pert” by tax geeks — to save on estate and gift taxes.

According to Bloomberg News, the Clintons drafted two (Qualified Personal Residence Trusts) QPRTs in 2010, divided the ownership of their Chappaqua, N.Y. home into separate 50% shares, and then moved those shares into the trusts. They bought the home 15 years ago for $1.7 million. Bloomberg says its estimated value for property taxes is $1.8 million. This tax strategy allows the Clintons to take the value of the home out of their taxable estate and pass it to beneficiaries without any estate tax at the end of the trust's term, so long as the grantors, President and Secretary Clinton, are alive at that time.

As an Investment News article, titled "Clintons shine spotlight on tax strategy that splits a house in two," explains that this is not a tool for everybody. A QPRT really is logical for only extremely wealthy people who typically own multiple residences and face high estate taxes. The article advises that to get "the biggest bang for your buck," the residence should be appreciating in value, so that when it is passed to the beneficiary and out of the estate, it will be worth significantly more.

The current estate tax and gift tax exemptions are $5.34 million for individuals, and $10.68 million for married couples filing jointly. An ideal candidate for a QPRT is an individual or a couple whose wealth is above those limits. Why? Because if you are over the exemption amount, you will be subject to estate taxes. If you are not above the limit, it is not a worthwhile plan. With a QPRT, a couple like the Clintons are able to split the ownership of the house and each create a QPRT with an interest in the home.

There are criteria the home must satisfy in order to be eligible for the trust. For example, this works best with a secondary residence (a vacation home) instead of a primary residence. Here is the rub - at the end of the QPRT term, the home passes to the beneficiary. The beneficiary will have to start charging the grantor rent should the grantor reside there, and some parents do not like the idea of paying fair market rent to their children to live the home that has been their primary residence. Nonetheless, rent can work out as a way for grantors to transfer wealth to their kids outside of the estate, as the children must declare that rent as income. The original article also warns that there could be an economic downturn. This, in turn, might leave the grantors with little in the way of assets and no access to home equity. The house also should not have a mortgage, which can add income tax problems to the calculus.

This is not a Saturday morning job on the honey-do list: drafting a QPRT is a job that will require experienced professional tax and estate planners. Talk with your estate planning attorney if you think that you are candidate for a QPRT, or even if you are not, to see if your current strategy is the best for you.

07/11/2014

Passing down your home is so much more than just a transaction. It’s a delicate process that affects your entire family—and with good reason.

The timing of creating an estate plan doesn't necessarily coincide with a certain age. As pointed out in a recent Forbes article, titled "Passing Down Your Home? 3 Steps To Creating A Successful Estate Plan," the timing of creating an estate plan has more to do with the different stages of your life. Whatever the reason for developing an estate plan, once you are ready to start planning the Forbes article recommends these three steps.

Step 1: Communication.When parents and grandparents leave important details to chance, the results can be catastrophic. Estate planning can be an emotional process—especially when children or grandchildren grew up in the home. Speaking with all of them and maintaining close contact with financial advisors can help families remain in control and diffuse any potential tension. An estate planning attorney can also help families manage the many moving parts of real estate inheritance. As the article advises, find "an experienced, high-end estate attorney to do this for you."

Step 2: Your Tax Situation.When passing down your home tax issues can be a real hassle, especially for high net worth individuals (estates valued at $3 to $11 million). There are different planning and tax strategies for these individuals, to include setting up trusts called Qualified Personal Residence Trusts (QPRTs) to discount the value of their estates. QPRTs follow IRS rate schedules that allow families to discount the value of their properties based on the amount of time they have lived in them. QPRTs also allow families to transfer homes to inheritors as a gift, which results in a lower tax rate. Estate planning attorneys will determine the discount that can be applied to value of your home. The longer you commit to living in a house, the bigger the discount can be.

Step 3: Plan a Maintenance Fund.The Forbes article warns that passing a home down to your children is about more than just transferring the property itself—there is maintenance and up-keep. Parents need to develop a plan to help their children and future generations finance repairs and other unforeseen maintenance expenses.

Passing down your home is a delicate process that impacts your entire family. Your family home is one of your most valuable assets and a source of treasured family memories. With diligent planning and partnerships with a qualified estate planning attorney, you can help make sure that your home remains well-maintained and in your family for years to come.